Lessons of an Investing Addict Part 3: Margin

Using "margin" means borrowing money from your broker to purchase more stock than you could afford using only your available cash.  Think of it like a credit card that you can only use to buy stock.  In this case, there can be a tremendous upside to taking the risk of utilizing margin, but there is also a significant downside if the investment goes against you - even more of a downside than just the interest you pay on the borrowed money.

The Federal Government (Regulation T) allows you to borrow up to 50% of the initial purchase price of a position, called "initial margin".  Beyond that requirement, brokerages require a minimum equity maintenance to be kept to minimize potential losses to you and to them.  These minimum maintenance requirements can vary. 

Lessons of an Investing Addict Part 2: Book Value Strategies

“I’m not very good at judging people. So I found that it was much better to look at the figures rather than people. I didn’t go to many meetings unless they were relatively nearby. I like the idea of company-paid dividends, because I think it makes management a little more aware of stockholders, but we didn’t really talk about it, because we were small. I think if you were big, if you were a Fidelity, you wanted to go out and talk to management. They’d listen to you. I think it’s really easier to use numbers when you’re small.” -- Walter Schloss

In Part 1 of this series, I talked in generalities about laying the groundwork for becoming a successful investor.  I discussed some good literature to get you started down the right path and suggested familiarizing yourself with economic cycles.  Finally, you should choose whether you identify yourself as a speculator, a trader, or an investor and then to get your feet wet by putting a minimal amount of funds into a discount brokerage to get a "feel" for the market.

I have spent years researching different methods of equity investing and learned some expensive, but valuable lessons along the way.  My ego has led me to believe I could trade stocks and beat the market; convincing me that somehow I had the gift to outdo the money managers who live and breath this stuff all day, every day.  I have since moved on from the guessing game and built an investment strategy around the techniques of Graham, Buffett, and my favorite, Walter Schloss. 

If you have any doubts about the effectiveness of a long-term value-investing approach, I highly encourage you to read "The Superinvestors of Graham-and-Doddsville", a speech by Buffett to a class at Columbia.  Buffett does a fantastic job articulating the school of thought that these "Superinvestors" adhere to while dispelling the argument that randomness is solely responsible for an investor's success.

Lessons of an Investing Addict Part 1: The Groundwork of an Investor

I've discussed in previous posts that keeping a tight budget is very important in reaching your financial goals.  A Google search will turn up hundreds of articles providing ideas on how to trim your budget and an entire blog community exists full of participants trying to outdo one another on who can live in the most frugal manner.  I think that is a little extreme.

Instead, I want income growth to be the main driver of my financial independence.  I tend to focus much of my free time and energy on stock investments and I will outline my strategy here.  Disclaimer:  I also mentioned in a previous post that I don't necessarily agree with Jim Cramer's overall investment philosophy, but from his book "Real Money", I wholeheartedly agree with his concept of dedicating a minimum of 1 hour per week per stock to research.